Typically, the next step has the parties enter a formal contract documenting the transaction. It is crucial to ensure the contract is well drafted to protect your interests and covers all important aspects of the transaction – whether that be a share purchase or an asset purchase agreement.
This part will discuss the importance of ensuring all the key terms in the agreement are correct and where things can go wrong.
what should be covered in the sale agreement?
1. the purchase price and related terms
There is a common misconception that the purchase price is ‘just a number’. However, some of the most important aspects of the agreement to get right are the mechanics of:
- how the purchase price is paid
- what adjustments need to be made [to the number]
- any working capital contributions
It is important to also consider what your position is regarding matters such as adjustments for employee leave entitlements and stock.
One of the most important areas of the agreement, and often the most negotiated, is the retention clause [if applicable]. Retentions are used to ‘hold back’ a portion of the purchase price pending certain events happening or pending a warranty period expiring, whereby the buyer has a form of guarantee for potential claims.
It is important both parties consider the amount of any retention held and what the terms of retention are. Whilst an attractive scenario for a seller is to have a smaller retention, the buyer will push for a higher retention for as long as possible. It may also be the case that the parties are able to negotiate that there is no retention and that additional warranties are provided by the seller in its place.
3. milestones and earn-out provisions
It is important that any milestone to the transaction is documented, particularly if you have agreed on an earn-out provision. Earn-outs typically consist of contingent, additional payments that can be made after the satisfaction of certain milestones relating to future performance. These earn-outs expire at a specified date in the future.
The purpose of these earn-outs is to mitigate risk for the buyer, particularly where the future of a business is uncertain. There is however, a risk that there is a misrepresentation of the buyer’s goals with respect to an earn-out provision, and they should be carefully drafted to ensure the milestones are very specific with a clear formula or method for determining an earn-out.
4. special conditions
You may have agreed on special terms, perhaps you have a condition precedent to completion happening. It is important those terms are incorporated into the written agreement, with the details of when that condition must be satisfied by, and what happens if a party doesn’t comply with that condition.
5. the nature and extent of representations and warranties
Warranties and representations made either prior to agreement or formalised within your agreement are incredibly important to both the seller and buyer and should be carefully drafted.
From a seller’s perspective, it is important these are qualified to the greatest extent possible and are only made with knowledge qualifiers.
As a buyer, consider the important aspects of what it is that you are requiring and what warranties you require. Matters such as intellectual property, financial and liability representations and employees often take a particular focus.
6. restraints and non-competes
If you are acquiring all the shares in a company or acquiring the whole of the business, it is important to consider the terms of any restraint that is to be placed on the seller. Restraints and non-competes should be carefully drafted to ensure that they prevent the seller from competing with the buyer, or from contacting clients and employees for a specified period following completion. As a starting point, there needs to be consideration as to what is really needed to protect the goodwill that the buyer is paying for.
Have you considered what happens if there is a dispute under the agreement? Often, parties don’t consider what happens if there is a disagreement prior to completion. For example, the parties disagree about the purchase price calculation. It is important a carefully drafted dispute resolution clause is included in your agreement. This ensures there is no ambiguity, and keeps the deal moving forward, even in the event of a dispute.
So, you think you have everything covered and the parties are happy working towards completion… but have you considered what happens if a party cannot comply with their obligations under the agreement? Perhaps they fail to comply with a condition precedent, or they default at completion. In such circumstances, the agreement should carefully step out what happens, who is entitled to what, and what claims the parties may have against each other.
where things can go wrong
Often where things can go wrong, is where the parties have not considered what happens in specific scenarios, or in areas of the agreement that have not been carefully drafted to truly reflect the intent between the parties. Please note the above is not an exhaustive list of matters that should be considered, and each agreement should be highly tailored to suit your needs.
we’re here to help!
It is important that when documenting your agreement, you contact an experienced lawyer to ensure your interests are protected. If you are considering purchasing a business, business assets or shares in a company, get in touch with the team at businessDEPOT Legal via email@example.com or give us a buzz on 1300BDEPOT to discuss how we can help you.
Stay tuned for part 5 of this M+A series which explores earn-outs and vendor finance.
general advice disclaimer
The information provided on this website is a brief overview and does not constitute any type of advice. We endeavour to ensure that the information provided is accurate however information may become outdated as legislation, policies, regulations and other considerations constantly change. Individuals must not rely on this information to make a financial, investment or legal decision. Please consult with an appropriate professional before making any decision.